Nike Inc., at its first investor meeting in two years, set an ambitious growth target to reach sales of $50 billion by 2020. Particularly strong growth was predicted for its women’s business, running, Jordan Brand and e-commerce.
To facilitate this growth, the company plans to accelerate digital investments, partnerships and advanced manufacturing capabilities, including new alliances with manufacturer Flex, a $26 billion company with a presence in 30 countries, and DreamWorks, the animation studio. The company also revealed the opening of the Advanced Product Creation Center at Nike’s headquarters with an overall goal of leading the industry charge in delivering cutting-edge technologies to the marketplace.
“Today, we’re showing how Nike is built for growth now and for years to come,” said Mark Parker, Nike Inc. president and CEO, at the meeting held last Wednesday at Nike’s headquarters in in Beaverton, OR. “We lead because we serve the athlete and consumer completely through breakthrough product and personal experiences, all around the world. As we look toward 2020, we are accelerating the pace of innovation across every area of our business to deliver the very best to athletes everywhere when and where they want it.”
The fiscal 2020 growth target implies a roughly 10 percent compounded annual growth rate over the next five years. In its fiscal year ended May 31, Nike reported revenue of $30.6 billion, a 10 percent jump from a year earlier. At its previous investor meeting in 2013, officials had projected revenue would reach $36 billion by fiscal 2017.
Among the primary financial objectives through the end of fiscal 2020:
Revenue growth: average annual growth in the high-single to low-double digit range
Gross margin: expansion of 30 to 50 basis points per year, on average
SG&A: Slight leverage, on average
EPS growth: average annual growth in the mid-teens range
Return on invested capital: in the high-twenties to low-thirties percentage rate
Free cash flow: growing faster than net income
Capital expenditures: approximately 4 percent of revenues
Dividend payout ratio: 25-35 percent over the next five years
Total returns to shareholders: in the top quartile of the S&P 500.
Regionally, North America revenues for Nike Brand are projected to reach $20 billion in revenue by the end of fiscal 2020, which compares to $13.74 billion in fiscal 2015.
For its developing geographies (Emerging Markets, Greater China, and Central & Eastern Europe), growth for Nike Brand is expected at a low double-digit average annual growth rate for the next five years. Emerging Markets (Brazil, Mexico, Argentina, etc.) are expected to grow at the same low double-digit average annual growth rate. Greater China is expected to expand at a mid-teens growth rate over the next five years, reaching $6.5 billion in revenue by the end of fiscal year 2020. Greater China’s sales were $3.07 billion in fiscal 2015.
By channel, Nike Brand DTC (direct-to-consumer) revenue is expected to hit $16 billion by fiscal 2020, up from $6.63 billion in fiscal 2015, driven by its digital business as well as inline and factory stores. Particularly supporting that growth is e-commerce, expected to hit $7 billion by fiscal 2020, up from less than $1 billion currently. Wholesale growth is expected to expand in the mid-to-high single-digit range over the next 5 years.
Among key growth categories, running is expected to reach $7.5 billion by the fiscal 2020, up from $4.85 billion in fiscal 2015. Jordan, which will now be reported separately from the Nike Brand, is expected to double its sales to reach $4.5 billion by 2020. Nike Women, now a $5.7 billion business, is expected to reach $11 billion by fiscal 2020.
At the event, Parker noted that over the past 10 years, Nike’s revenues have more than doubled, its EPS more than tripled and its stock outperformed the broader market and delivered top quartile total shareholder returns.
“You know it’s clear that Nike is a growth company and we have never been more confident that we’ll continue that pace of success,” said Parker. “The opportunities for sport are really everywhere and that means that the opportunity for Nike is everywhere.”
HEALTHY LIVING TREND BOOSTING GROWTH
He noted that shifts are “happening at very high speeds” with attitudes and behaviors changing for the benefit of the market for sports. This includes “skyrocketing numbers” moving into the middle-class, driven by Asia; but also a sustained interest in healthy living that has replaced short-term fitness trends.
“Women in particular have fueled the new lifestyle of sport driving the growth of athletic apparel and footwear,” stated Parker.” In fact global athletic apparel has grown at a faster rate than overall apparel the last 4 years.”
Around buying habits, mobile has taken with global e-commerce sales expected to double to $3 trillion from 2014 to 2020. Said Parker, “These are the kind of seismic shifts that create tremendous opportunity and play right into our strengths.”
Parker credited Nike's success heavily to its elite roster of athletes, who not only promote the brand but drive innovation in supporting Nike’s team quest to help athletes perform better. Over the past 25 years Nike has built the third largest design patent portfolio in the U.S. Added Parker, “And what sets us apart is our ability to build a business around our breakthroughs. We invent and then we scale across sport categories and geographies.”
He pointed to breakthroughs such as Nike Air, Dri-Fit, Free, Lunar and most recently, Flyknit, that have fueled growth. He added that with Flyknit’s success, Nike is understanding that the “lines between programming and designing have been blurred,” and that’s prompted Nike to open the 125,000 square foot Nike Advanced Product Creation Center at its headquarters.
The facility will house the latest knitting machines, 3-D printing and automation technologies and sit alongside workspaces for engineers and material scientists seeking out the next breakthrough like Flyknit. With the space, designers will be able to avoid the “back and forth” in the development process, sending design files to the coders, programing the machines and sending the code to the factory to make the final product.
Said Parker, “We’ll be inventing new ways to give consumers more choice, more personalized product and faster delivery. This is exactly the type of investment that will accelerate our separation in the marketplace.”
Parker also stressed how digital is fundamentally transforming the consumer experience and how it’s much more than creating digital communities but seamlessly linking the entire journey from digital to in-person experiences at retail and events.
“We have the platform and the teams in place today to deliver it, to be personal at scale,” said Parker. “We have one billion consumer touchpoints a year, powering the largest athletic network in the world.”
The company reaches consumers with the Nike and Jordan brands through sport, Hurley through surf and Converse through music and creativity. And Parker said both Converse and the Jordan Brand have never had more opportunity to “find ways to diversify their products and expand their global footprints.”
As an example, he noted how Chuck Taylor received a boost with the introduction last quarter of the Chuck II featuring Nike’s Lunarlon II sock liner.
“This was just a glimpse of the future of Converse and how we’ll develop new ways to excite their dedicated consumers,” said Parker. “Leveraging the power of Nike for Converse is huge.”
Parker further said it’s time for the Jordan Brand to move beyond the confines of the past thirty years of being largely limited to men’s basketball. Beyond the single sport, Jordan Brand is largely only sold in the U.S., to one gender and mainly in only footwear. Said Parker, ““I think the time has come for the Jordan brand to spread its wings and grow beyond the sport of basketball.”
The company has been slowly introducing Jordan branded products in different categories, making a tennis shoe for Roger Federer and track spikes for American sprinter Kori Carter.
Parker also credited Nike’s partnerships for helping extend Nike’s reach. The brand is already working with the NBA to further digitally connect fans to the game when it takes over the license from Adidas. Said Parker, “With the power of our three brands, Nike, Jordan and Converse we can bring added value to the NBA and the sport of basketball by driving more innovation and fueling the excitement around the culture of the game around the world.”
A CATEGORY OFFENSE UNLOCKS OPPORTUNITIES
Trevor Edwards, president of Nike Brand, detailed how Nike’s personal and premium digital experience serves a shifting marketplace of on-demand consumer expectations, expediting the company’s growth. Said Edwards, “The world is changing. It’s faster paced, more connected, and more personal.”
But he particularly singled out the success of Nike Brand’s category offense initiative, which has helped the Nike Brand grow 70 percent since its launch.
“There’s no question that by drilling down on the sports that consumers love, we uncover the new growth opportunities across the marketplace,” said Edwards. “And by segmenting the market, we increased our leadership by focusing on how best to serve this diverse world of consumers.”
The Nike Brand will pursue new opportunities, including global football’s reinvention of training, Jordan’s expansion into new categories, or women’s sportswear “creating sneaker culture for her.” But the category offense has proven to continually help the brand expand existing categories
As an example of how Nike can pinpoint on an opportunity, Edwards noted how Nike is able to connect with women athletes through its Nike Plus Running app, Nike Training Club app, and Nike Run Clubs at local stores, as well Nike.com. At retail, the experience for women has been recently elevated with the opening of women’s-only stores in Shanghai, London and Newport Beach as well as through concepts such as Chelsea Collective with Dick’s Sporting Goods and 6:02 with Foot Locker.
“This is where it all comes to life, personalized inspiration, a powerful community, amazing innovative products, great services and industry-leading premium retail,” said Edwards of the stores. “No one else has the ability to bring all the pieces together. No one else has the ability to serve her this completely.”
Nike has opened 173 new premium women’s spaces in fiscal 2015 and plans to open more than 1,000 premium new women spaces over the next 5 years.
Among other speakers, Jeanne Jackson, president, product and merchandising, discussed how Nike invests in innovation to create beautiful, head-to-toe integrated performance systems. She also revealed a unique partnership with DreamWorks and its newly formed technology company, NOVA. Using the NOVA visualization platform, Nike is building a 3D digital design system that will transform its product creation process. The partnership will deliver nearly instantaneous digital print applications, photo-real 3D visualizations and ultra-rapid prototyping.
Said Jackson, “Having premium, on-demand 3-Dimensional imagery will further unleash our team’s ability to obsess their craft, to fuel their imagination and deliver performance innovation for our athletes.”
Jayme Martin, VP/GM of global categories, further outlined how the company’s category offense connects consumers physically and digitally 24/7, 365 days a year to Nike products and services. Said Martin, “With our global marketplace footprint, we find and target new opportunities. When we land these opportunities, we then scale them with a power and at a scale and a pace no one can approach.”
Elliott Hill, president, geographies and sales, and Christiana Shi, president, direct-to-consumer (DTC), outlined Nike’s global integrated marketplace strategy, comprising Nike.com (including mobile), brick-and-mortar stores and unique concepts at multi-brand partner retailers.
Eric Sprunk, COO, described how advances in Nike’s manufacturing revolution transform what the company makes and how it makes it through lean manufacturing, manufacturing modernization and manufacturing innovation, such as Flyknit, ColorDry and 3D printing to produce progressive cushioning systems.
“Last year, we shipped roughly 1.1 billion units through our supply chain,” said Sprunk. “Getting product to the right place at the right time now involves approximately 700 contract factories, 58 distribution centers, delivering that product to approximately 20,000 accounts and 110,000 retail doors. Now operations at that scale are innately complex and becoming more so as we continue to accelerate our growth in areas like nike.com and our partnerships with the NFL and the NBA.”
SUPPLY CHAIN FOCUSED ON SPEED
Sprunk likewise underscored how Nike’s Advanced Product Creation Center will help improve collaboration and reduce the time from concept to product. He also announced a partnership with Flex, a manufacturer with expertise in design, medical, engineering, manufacturing and global supply chain management, with sketch-to-scale solutions.
“Together, our teams will greatly increase the pace and speed at which we catalyze innovation across our global supply chain and revolutionize the way we manufacture our product,” said Sprunk. “This will allow us to reach consumers more quickly, respond to the marketplace more dynamically, provide more customized solutions and deliver increased performance in our product.”
Andy Campion, EVP and CFO, wrapped the event by providing a rundown of Nike’s financial projections while also talking up how the power of digital technology is accelerating and enhancing Nike’s ability to segment even further down to the exact specifications of individual consumers. He said Nike unlocks those opportunities through a three-pronged approach.
“One, we develop deep and inspiring brand connections, be that through the greatest moments in sport, our Run Clubs, storytelling around our products and now increasingly, by simply serving our consumers more personally one-to-one,” said Campion. “Two, we create a relentless flow of innovative products that exceed consumer expectations. And three, we then provide our consumers with premium services and greater access to those products they love through category focused retail experiences, both in- store and online. That is how Nike creates value for consumers and that is how Nike drives growth.”
